Extra R7.4bn in tax collection eases rating downgrade fears

THE fiscus got some muchneeded good news this week when Finance Minister Nhlanhla Nene revealed that far more tax had been collected than expected — which will lessen the likelihood of another downgrading by the credit rating agencies.

The extra tax revenue will reduce the government’s projected budget deficit and improve the country’s fiscal profile at a time when sluggish economic growth would normally have the opposite effect.

Nene said on Wednesday that the SA Revenue Service (SARS) had collected R7.4-billion more in taxes in 2014/15 than estimated in the budget tabled by the Trea- sury in February, largely because of improved compliance.

Analysts said this could trim between 0.1 and 0.2 percentage points off the projected budget shortfall of 3.9% of gross domestic product for the financial year to the end of last month. If this momentum continues it will improve this year’s deficit outcome as well.

“It is better than I would have expected and it’s positive for fiscal consolidation — pressure from ratings agencies will ease,” said Renaissance Capital economist Thabi Leoka.

She said the narrowing of the budget deficit would improve South Africa’s financial profile relative to those of other emerging economies, encouraging capital inflows from investors and supporting the rand following its sharp depreciation to 14year lows earlier this year.

That would be positive for the country’s credit rating, which was reduced last year by Standard & Poor’s (S&P) to BBB-, the agency’s lowest investment grade. Credit ratings matter because they help determine a country’s cost of borrowing and affect its appeal to foreign investors.

Moody’s also downgraded South Africa, to one notch above the S&P rating, and to the same level assigned by Fitch, the third big global rating agency. But Moody’s has given its rating a stable outlook whereas Fitch gave its grade a negative outlook, which means it could be downgraded when Fitch carries out its next scheduled assessment in June.

But Treasury officials have been quick to counter speculation of a significantly improved budget outcome. At a press conference after Nene’s announcement, the officials said that new revenue updates were due only later in the year — and the final numbers will not be clear until expenditure outcomes are also known.

“The R7.4-billion over-collection does mean that the deficit for 2014-2015 is now lower than that we presented in the budget in February . . . but we can’t just use this quickly to extrapolate the deficit for the financial year that starts today, and future ones,” said Treasury directorgeneral Lungisa Fuzile.

Altogether, SARS collected R986.4-billion last year — 9.6% more than in the previous year. The main contributors to the revenue were personal income tax, which grew by 13.8% to R353.8-billion; corporate income tax, which rose by 4.1% to R186.9-billion; and value-added tax, which increased by 9.9% to R261.1-billion.

This preliminary outcome is lower than the R993.6-billion the Treasury projected in February last year but that estimate reflected an expected gross domestic product (GDP) growth rate for 2014 of 2.9%, which has since been revised to 1.4%.

“It is one thing getting very good results when the economy is strong but when sentiment is negative and GDP growth is in decline the challenge is much more significant. To have achieved this year’s outcome in this context is significant and substantial,” Nene said.

He said the numbers were “proof that SARS is an efficient and stable institution” despite media reports speculating on the adverse effects on the service of the departure of several of its top officials.

“Let me assure you that we guard jealously its ability to do the job without fear or favour,” Nene said.

Nedbank chief economist Dennis Dykes said that the tax outcome was a good sign but not a complete surprise because the Treasury was usually conservative in predicting fiscal outcomes to avoid nasty surprises.

“It’s the correct thing to do. This is good news and it does imply that we are starting next year on a good footing. If we are able to keep up the momentum, we are headed for a similar development in the year ahead,” Dykes said.

Tax compliance measures introduced by SARS in the past year included the broadening of the tax base for small- and medium-sized enterprises, which led to more than 18 000 companies submitting tax returns for the first time.

Legislation introduced in 2010 to change the way in which share incentive schemes are taxed contributed significantly to personal income tax collections in the 2014-2015 financial year, Nene said.

Deputy Finance Minister Mcebisi Jonas said that a panel set up by the Treasury in February to look at allegations of corruption at SARS was taking a long-term perspective instead of making a short-term response to media reports of a “covert unit” at SARS.

It is better than I would have expected and it’s positive for fiscal consolidation — pressure from rating agencies will ease